A massive GDP number

SPEAKER_1 (0:00)

One way that you can do with, if you like, unknown unknowns, is to ensure that agility is actually built in. So whatever happens, whichever scenario plays out, you're quick to react to the fact that you've identified a new regime or a new environment.

SPEAKER_2 (0:16)

To hear more about predicting risk events and managing portfolio risk, subscribe to P. Jim's The Ouch Thinking Investor in your favorite podcast app.

Ethan Wu (0:36)

Pushkin.

The US economy in the third quarter grew 4.9%. That's inflation adjusted, and that is simply bonkers. After a year or more of everyone fretting about recession, we've gotten it not just wrong, but it's actually the total opposite. The economy is booming. Today on the show, we talk about the unstoppable engine behind it all, the US consumer.

This is Unhedged, the markets and finance show from the Financial Times and Pushkin. I am reporter Ethan Wu here in the New York studio, joined today by one Robert Armstrong who's calling in from his mother's basement in Boston.

Robert Armstrong (1:15)

In some sense, Ethan, in my head, I'm always in my mother's basement. That could be my problem, but today I'm actually there.

Ethan Wu (1:22)

Yes, the basement is a mentality, but today it's not.

Rob, just first off, we have to just say like, wow, right? Like 5% growth. Did anyone think we were going to be a 5% growth in the third quarter of 2023? I mean, earlier this year, there are professional macroeconomic forecasters that thought we were going to be in recession in the third quarter of 2023

Robert Armstrong (1:42)

Yes, that was consensus a year ago. 100% chance of recession. And we're in a boom, an expansion.

I remember you and I, just a few months ago, looking at the Atlanta Fed's real-time GDP indicator and thinking it must be broken, right? We were like essentially banging on the side of the TV to get the reception to come in better. But it was right. The economy turns out to have been as strong as it appeared, and it appeared incredibly strong.

Ethan Wu (2:13)

Yes, yes.

Robert Armstrong (2:13)

There's just a huge amount to talk about here.

Ethan Wu (2:15)

To the credit of the econometricians at the Atlanta Fed, they got this exactly right. They said about 5% two months ago, and it was just about 5%. Now, of course, with any given quarterly GDP reading, there's gonna be some anomalies, some idiosyncrasies, some stuff that will revert next quarter. But we gotta talk about kind of the core of this expansion, and something that's been true for some time now, which is the consumer.

Real consumption in the third quarter grew 4%. And that's really been the story all along, hasn't it? That the consumer can drag along any kind of more abundant part of the economy as long as they're able to spend.

Robert Armstrong (2:46)

We can tell this story, Ethan, in the results of one company.

And that company is Coca-Cola.

Every quarter, for like 12 quarters now, they increased prices 5% from the year before. The consumer does not care. Keeps drinking the bubbly sugar water like the price was exactly the same. It's like, what can they make Coca-Cola $10 for a can of Coca-Cola and will still drink it? I don't know. Like, where does this stop? It's crazy.

Ethan Wu (3:16)

It really is. And if you're Jay Powell, you've got to be looking at this and saying, I don't know what the hell's going on.

Robert Armstrong (3:23)

Yeah, I think the faint thumping sound you hear is him banging his head on his desk, where it's like, I raise interest rates 500 basis points.

I turn the volume up on monetary policy to 11 And the economy is like, what was that, Jay? I can't make it out. Can you speak a little louder? They just don't care. What is this guy supposed to do? Inflation's above target. He's got to get it down to 2%.

He's done basically everything a central banker can do. And the economy is still flaming hot.

Ethan Wu (3:56)

Yeah, let's break it down, right? So what has kept the consumer spending? I think it's the question that we want to ask ourselves. And I think to answer that question, you got to take it back to COVID. I mean, back then, the Fed cut interest rates basically to zero. And everybody that owns a house, which is like 100 million plus people in America, said, I'm going to refinance at 2% or 3% mortgage rates. And estimates are that that generated hundreds of billions of dollars in incremental cash flow for households, because they were just paying less on their mortgages.